Investors seeking greater diversification amid volatile markets and a looming global economic downturn may want to take some hints from legendary investor Warren Buffett. Or at the very least a fund inspired by his rigorous investing methods, like Morgan Stanley’s $1.1 billion International Opportunity Portfolio (MIOPX), managed by Kristian Heugh.
While unlike Buffett in that the fund invests in foreign stocks rather than only U.S. issues, Heugh, like Buffett, believes in concentrated long-term investing. “One of the great concepts [Buffett] focuses on is that of time—not timing the market, but time in the market,” Heugh told Barron’s.
Over the past five years the Morgan Stanley fund has bested 98% of its peers with an average annualized return of 9.3%. The fund held the stocks of 35 companies, as of Jan. 25, 2019, and is benchmarked to the MSCI All Country World Ex-U.S. Index.
MS International Opportunity vs. Rivals (average annual return—3 years)
- MS International Opportunity Portfolio, 9.08%
- MSCI All Country World Ex-U.S. Index, 4.48%
- Lipper Category Average, 2.78%
- Morningstar Category Average, 3.21%
Source: Morgan Stanley
What It Means for Investors
Every newcomer to Heugh’s investment team is asked to read a book of Warren Buffett’s writings, covering 50 years of Berkshire Hathaway’s annual reports and containing kernels of wisdom from the Oracle of Omaha himself. Another expectation of the investment team is that they follow their own advice, meaning that their own personal portfolios have exposure to the same investments as the investors in the fund. “Eighty percent of my financial assets are in the funds we manage,” says Heugh.
Heugh and his team also look for companies whose executives have heavy inside ownership of the businesses they are managing, which is a good indicator that such executives will be more concerned about the long-term health and growth of the business. Seeking long-term capital appreciation, the International Opportunity Portfolio is characterized by investments in high-quality established and emerging companies that appear undervalued. Given its long-term focus, the fund looks for companies that can secure growth and value creation over extended periods of time, avoiding stocks that are primarily driven by short-term events.
While diversified among all sectors, the fund is primarily exposed to Consumer Discretionary and Consumer Staples sectors, with 36.79% and 25.45% of total net asset exposure, respectively. Geographically, the fund is most exposed to China with 20.43% of total net assets invested there, while 14.18% of total net assets are invested in the U.K. and 11.40% in the U.S. The fund’s top five holdings and their percentage weight of total net assets include: Moncler SPA at 7.64%; Tal Education Group (TAL) at 6.53%; HDFC Bank Ltd. (HDB) at 6.28%; DSV at 4.98%; and, EPAM Systems Inc. (EPAM) at 4.81%.
Despite the strong performance over the past five years, the fund has fallen more than 10% in the past year as global markets have fared poorly. But for investors looking for greater diversification beyond the U.S., the International Opportunity Portfolio could be a way to benefit in the long term if U.S. markets descend into a prolonged downturn.